10 Commandments for Common Sense Penny Stock Investing

It doesn’t matter if you attended an Ivy League university, community college or only high school. You don’t need education to be a great penny stock investor. You only need to be smart. There’s a big difference…

One of the first steps you can take toward investing success is by subscribing to and reading the Daily Reckoning email edition. Then all you need to do is learn how to take advantage of the many tools at your disposal to rack up huge gains in the stock market.

But before you can do that, it’s crucial that you learn how to avoid the deadly pitfalls that sadly ensnare many penny stock investors every single day…

The first one you hear is from talking heads on TV, financial pundits, brokers and analysts. They want you to believe that you have to buy large, expensive stocks, because it’s how they make money off of you.

I’ll tell you right now — if you choose to believe this myth, it will keep you at the bottom of the financial food chain for the rest of your life.

This is what Wall Street wants you to believe: To be a successful investor, you should buy only big-name stocks and hold onto them for years. Mark my words, absolutely nothing could be further from the truth.

What they really want from you is control of your money. They want you to leave it with them and forget it.

And here’s why they hope you’ll never bother to challenge the myth…

Your broker makes money whether your portfolio soars or falls. All he cares about is that you’re buying or selling stocks. He takes his commission and you’re left with stocks that could be profitable, but are more likely just the “hot picks” of the week that will lead your portfolio down the drain in no time.

But as you’re about to see, you can do a lot better. You can win at the stock market when you use the power of penny stocks to your own profitable advantage. And better yet, you can keep more of your money without worry that your broker’s advice might be costing you more than just your cell phone minutes…

On Nov. 19, 1984, you could have picked up shares of the emerging biotechnology firm Amgen Inc. for $3.63.

Amgen shares soared, and took some savvy investors on the ride of their life…

At its peak, those shares would have been worth around $123.00. Taking into account Amgen’s five splits over the past 22 years, you can knock that original 1984 price down to about 9 cents a share.

It’s almost impossible to believe that a company that would cost you pennies could turn into an $80 billion pharmaceutical giant specializing in the treatment of rheumatoid arthritis, anemia and psoriasis.

But Amgen did it…and investors who saw its potential laughed all the way to the bank.

Don’t worry, there are still plenty of legitimate penny stock opportunities like that one that you can still capitalize on. But before you do, it’s important for you to convince yourself that the easiest way to make money in the stock market is by investing in penny stocks. And there are cold, hard facts to back up this claim.

The smallest stocks on the market — those with market capitalizations of less than $2.5 billion — have dominated the market recently, outpacing the large caps in each of the last seven years. But what many investors may not realize is that this is not a fluke. Historically, smaller stocks have always led the market.

“My $180 investment went to about $4,200 in a single day!” — Kyle Biggins, a NY reader who invested in penny stocks.

A famous study conducted by Ibbotson Associates in the 1990s found that these small stocks outperformed all other stocks 56% of the time between 1926–1996 — including the blue chip stocks that get all of the media’s attention. The average return in any given year was 14% for small stocks. It was just 9% for large stocks. And the longer you held your small stocks, the better off you were.

Since 1926, there has never been a period of 25 years or more in which investing in large-cap stocks has proven more lucrative than investing in small-cap stocks. Of course, there are many reasons for these great small-cap returns.

First of all, there are a lot more small-cap companies on the market. About two-thirds of all the companies on Wall Street have a market cap of $2.5 billion or less. So as a penny stock investor, you have a much wider universe in which to find moneymaking opportunities.

And because there are so many small companies, the major brokerage firms and institutions don’t have enough analysts to cover them all. So they simply ignore some of the fastest-growing companies on Earth. As a result, you can buy into some tremendous businesses trading for virtually nothing.

Smaller companies can also adapt to the changing marketplace and react quicker than their large-cap peers. Think about it this way: It’s a lot easier for a $200 million company to double than it is for a $255 billion company to do the same.

Discovering a company’s hidden potential before anyone else can be extremely rewarding. After all, getting in before the crowd is what makes a select few investors rich.

It doesn’t take many smart penny stock plays to make a lot of money, either.

This is how you have to play the penny stock market in order to be successful. You have to swing for the fence and let your big winners make up for the strikeouts. But the difficult part is how you find these home runs.

In the world of smaller stocks, it sometimes takes a lot more than simple valuation to measure a company’s potential. After all, a lot of these small companies aren’t even turning a profit…yet. The trick is to pick out the ones that will, while avoiding the ones that could be poison to your portfolio.

I’ve spent a long time perfecting stringent guidelines for my Penny Stock Fortunes readers to make sure they’re exposed to the best penny stock plays. Out of fairness to them, because they pay for my research service, I won’t give away my system.

However, I can give you some very basic, but vital penny stock investing rules that you can use to protect yourself against plays like CYNK while still taking advantage of penny stocks’ explosive profit potential.

I call them the “10 Commandments for Common Sense Penny Stock Investing”. Here they are…

P.S. One way I advise you start is by investing in what I call “pre-IPO” companies. These are exactly what they sound like — promising companies that have yet to go public. This is a proven way to grow rich very quickly. In today’s email edition of The Daily Reckoning I gave readers a chance to discover a handful of great pre-IPOs I believe will go public by December 23, 2014. It’s just one small benefit of being a subscriber to the FREE Daily Reckoning email edition. Don’t miss out on any more of them. Sign up for FREE right here to get started.

About Jonas Elmerraji:

Jonas Elmerraji is Agora Financial's in-house "quant." Jonas started his career working in investment operations for a mutual fund company with $617 billion in assets under management. After that, he pulled a short stint at a prestigious Big Four public accounting firm, working on financial statement audits for Fortune 500 companies. At Agora Financial, Jonas works on algorithmic trading strategies and proprietary investing tools that give retail investors a statistical edge over Wall Street. His Archimedes trading platform powers the strategies behind the Kinetic Profits newsletter. Jonas is also a senior contributor to TheStreet.com and has been featured as an investment expert in Forbes, Investor's Business Daily and CNBC, among others. He holds a degree in financial economics from UMBC as well as the Chartered Market Technician designation.